In Predatory Lending, Part 1: an Overview, we painted a picture of how dangerous the waters of predatory lending can be. To review, “Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford” (Debt.org). So what can you do to protect yourself, so that you don’t get taken advantage of and potentially lose the business that you’ve poured your blood, sweat, tears, and life savings into?
Educate yourself. Ask a lawyer to review the terms of your loan (think lawyers are expensive? They’re much less expensive than losing your business, house, car, job, and filing bankruptcy). Bring somebody with you to your signing to help you read through the documents. ALWAYS have at least 2 people check your loan. Pay attention to these lines on your Fees Worksheet: interest rate, “total estimated funds needed to close,” term/due in, total loan amount. Have someone who knows how to calculate these funds show you what you’ll really need to pay back each month. And if you think “business is going great: even if the interest rate is high I should be able to pay it off early,” please make sure that you are allowed to pay off early with no penalty.
So you’re probably reading this for one of the following reasons: you’re having trouble getting a loan at a bank, you don’t have a crazy amount of capital laying around so you haven’t approached a lender yet, or you’re embarrassed of your credit score. Maybe you’ve taken a peek at the online lenders flashing “cash quick, pre-approved,” across your screen or at high-interest “specials” at a bank. So what do you do if a traditional lender said “no” to you because of your plan, credit, “character” or some other reason, but you know you don’t want a loan from a scary lender?
Here’s the thing: if someone tells you that you don’t qualify for a loan, it might actually be a disservice to give you one. Hear me out. Debt is risk to your business. You’re opening your doors with a negative balance that might go increasingly in the red as you start to grow your profit enough to cover it. What if you don’t grow quickly enough to pay off your debt, pay your business expenses, AND pay for the “owner’s draw” to cover your living expenses? Not giving you a loan if you REALLY aren’t qualified (no industry experience, training, plan, viable financial projections, no money to put up that shows you’re willing to take a risk on yourself) could mean saving you from losing your business. Or your house, car, or anything else you put up as collateral. A trustworthy financier doesn’t want you to ruin your life. A predatory lender doesn’t care.
Lending is risky. The ideal predatory lending victim has minimal education on finances, a low credit score (it’s not just a number…it’s proof that you can handle money), and a lack of understanding of all of the components in a loan. Is that you? It doesn’t have to be. Don’t make yourself a victim.
But what do you do, if you DO still need a loan but you can’t get one from a traditional lender, let’s say your personal bank. Is your only option an online lender that might try to take advantage of you? Or an offshoot of a big bank that sees you as a big dividend for them? NO! That’s where CDFI’s come in. If I could make the words ‘Community Development Financial Institutions’ glitter, I would.
CDFIs are community based lenders, helping develop communities by investing in small business owners, usually ones who are diverse in some way (and therefore traditionally underfunded by mainstream lenders). They exist to look at the WHOLE picture: not just your credit score, but your character, collateral, capacity, and capital. Often, they have tools like business coaches who can help get your plans in order if you just need a little professional help. And usually, their services are free or low cost.
So why doesn’t everybody know about them? Well, they’re not rolling around in buckets of money like some lenders who charge exorbitant fees and have multi-million dollar marketing budgets. But you can find them through sources like the SBA, trustworthy guides like Fundera, or you can talk to us. Business Impact NW is a CDFI lender with technical assistance (read: business coaches and classes) to help you, no matter what stage you’re at.
- Decide if you need a loan.
- Educate yourself, so you choose your lender and terms with eyes wide open.
- Your bank saying no doesn’t mean you have to go get a loan with 15% – 20% – 50%- 100% or higher interest rates. Or $40,000 closing costs. Other options exist.
- Talk to us. We’re happy to help if we can!